-Caveat Lector-

from:
http://www.aci.net/kalliste/
<A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A>
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Russian Follies

Yeltsin's Rivals Say His Illness Makes No Difference

(because he's still dead)

MOSCOW, Jan. 18, 1999 -- (Reuters) Several likely candidates to succeed
Boris Yeltsin as Russian president shrugged off his ill health on Monday
as a long-standing problem and said it would not affect their political
strategies.
Yeltsin was taken to hospital on Sunday with a bleeding stomach ulcer,
the latest in a series of ailments that have driven him to the sidelines
of Russian political life.

The illness revived speculation that he would not be able to serve out
his term until mid-2000 and raised the specter of an early presidential
poll before then.

If Yeltsin were to be incapacitated, a new election would have to be
held within three months, giving candidates little time to prepare. But
leading candidates said word of yet another presidential ailment had not
changed their calculations.

"The president's poor condition is not news to us," Communist Party
leader Gennady Zyuganov told reporters in the Duma, where his faction
controls the most seats.

He repeated the Communists' long-held view that Yeltsin should hand over
more powers to Prime Minister Yevgeny Primakov, and said the government
and parliament should consider solutions to the power vacuum at the top,
including early polls.

"Since 1995 Yeltsin has not been able to work for a single complete
week," he said.

"The less he interferes in day-to-day life and real politics, the faster
the country will return to health."

Duma speaker Gennady Seleznyov, a Communist who is not expected to run
for president, said Yeltsin's illness "in no way alters the situation in
the country."

"If the president should suddenly require any serious treatment, for
that circumstance we have a constitution where everything is written
out, and there is a prime minister, so nothing should be unclear,"
Itar-Tass news agency quoted him as saying.

Moscow Mayor Yury Luzhkov, another possible presidential front runner,
also said Yeltsin's ailment was "not unexpected," but raised the
question of whether Yeltsin should resign.

Luzhkov, shown on Russian television during a visit to Sweden, said the
issue of Yeltsin's ability to lead the country "requires an answer, and
society and the country must hear from the president how he intends to
solve the problem."

"The president must make up his mind," he said.

A spokesman for Gen. Aleksander Lebed said the governor of the Siberian
Krasnoyarsk region and likely presidential hopeful would probably not
comment on the situation in Moscow.

"This has been going on for years and there is nothing new to say. We
have more serious problems of own here in Siberia, where we have serious
problems with fuel deliveries," spokesman Mark Denisov said by telephone
from Krasnoyarsk.

Reuters, Jan. 18, 1999


Reflection

LTCM and Low-Probability Events

by J. Orlin Grabbe

When hedge fund Long Term Capital Management lost 44 percent of its
capital last August, and in September had to be bailed out by a
consortium of banks organized by the Federal Reserve Bank of New York,
it was the victim of "low- probability events." These events included
Italian bond prices diverging from, instead of converging to, German
bond prices, and US Treasury bond prices rising relatively faster than
corporate and municipal issues.
Two of the founding shareholders of LTCM were Robert Merton and Myron
Scholes, Nobel-prize- winning economists. I find it ironic that in the
only extended conversation I have had with Merton, he was dismissive of
probability distributions involving just such low-probability events.

In grad school at Harvard, I was working on a category of "infinite
variance" distributions that seemed to characterize financial markets
better than the more commonly known "normal" or Gaussian distribution.
Saying the variance is "infinite" is another way of saying that sample
variance is not a useful way to measure risk in a probability
distribution, since any measure of variance will jump about at random,
and eventually diverge to infinity as the sample size is increased.

Market prices, such as exchange rates, commodity prices, and interest
rates, have proportional changes that are too "leptokurtic" to represent
drawings from a normal or Gaussian distribution. That is, by reference
to the Gaussian distribution, they have (1) a greater proportion of very
small deviations from the mean; (2) a greater proportion of very large
deviations from the mean (namely, those "low-probability events"); but
(3) a smaller proportion of intermediate deviations from the mean.
Imagine two erratic drivers driving along a highway. The mean location
of each is on the center line. Let the Gaussian distribution represent
the proportion of time the first driver spends on each part of the
highway. If the second driver has a leptokurtic distribution, this
 second driver spends relatively more time close to the center line and
relatively more time driving in the ditch than does the first, but
spends proportionately less time driving on the shoulders.

Non-existent (infinite) variances may seem odd, but as Benoit
Mandelbrot, the creator of the mathematical concept of fractals, has
noted: "Variances are an acquired taste."

One day I walked down Massachusetts Avenue to MIT, to talk to Paul
Samuelson, since he had written a couple of papers in the area. He asked
me some questions, and among other things suggested I talk to Merton,
since, as Samuelson eloquently put it, "He is an expert on the alpha
equals two case." (In the distributions I was looking at, having the
alpha parameter equal to 2.0 represented the single instance the
variance was finite; in fact, it corresponded to the Gaussian
distribution.)

Naturally I jumped at the opportunity to worm my way into Merton's
office (he was then teaching at the Sloan School of Management at MIT),
but found him to be largely dismissive of non-Gaussian distributions. I
eventually came to suspect that Merton's bias against non- Gaussian
distributions, particularly those with infinite variances, despite the
empirical evidence of such distributions in financial markets, came from
his reliance on a powerful result in stochastic calculus called Ito's
Lemma, which was uniquely helpful in deriving option-pricing models.
Ito's Lemma requires variances to be finite.

In my mind there is a strict different between what one does as an
exercise (and I have frequently used Ito's Lemma myself) versus what one
believes to be the case. But I don't think Merton ever paid much
attention to the difference. And I think that the low-probability events
Merton ignored came back to haunt him through Long Term Capital
Management.

Liberty, February 1999


Crisis in Brazil

Brazil Unexpectedly Increases Interest Rates

Real continues to fall


The Brazilian central bank announced a surprise increase in interest
rates last night in an attempt to calm investors after the Real weakened
further against the dollar during trading yesterday.


Directors of the central bank held an impromptu meeting to discuss
interest rates when the markets closed yesterday. They had earlier
confirmed they would let the currency float, but would intervene in an
"occasional and limited form" if there were any "disorderly" movements.


The decision to maintain the floating rate came after Brazil on Friday
became the latest emerging economy to abandon a currency peg against the
US dollar in the face of a new speculative attack which began last week.


Since August, the country's reserves have fallen by more than $40bn in
an attempt to defend the fixed-rate regime, which had been the
centrepiece of the government's anti-inflationary strategy.


The Real weakened yesterday to close at R$1.59 to the dollar, 10 per
cent down on Friday's close. However, share prices on the Bovespa index,
which soared 33.4 per cent on Friday on news of the float, rose to close
a further 5.4 per cent up, as equity investors continued to believe that
the devaluation would permit interest rates to fall sharply.


The central bank said its decision to raise the prime lending rate from
36 per cent to 41 per cent, which is valid until March 3, was designed
"to minimise excessive exchange rate volatility and consolidate price
stability".


The central bank's decision came after Pedro Malan, finance minister,
said yesterday that interest rates might have to rise in the short term
to limit inflationary pressures from the devaluation, which has seen the
Real weaken by more than 25 per cent over the last week.


Speaking in Washington after three days of meetings with officials from
the International Monetary Fund and US government, he said: "The only
way interest rates will fall is through progress on the fiscal
programme."


Additional budget cuts would be made if needed, Mr Malan added.


Odair Abate, chief economist at Lloyds Bank in S�o Paulo, said: "His
comments are an indication that the government's priority will be to
control inflation." Some analysts believe the level of interest rates
will become the subject of an intense political battle.


Mr Malan admitted that the terms of Brazil's $41.5bn aid package, led by
the IMF, would need revision, but said the government was not seeking an
early release of the second tranche of money, which will be available in
February.


Michel Camdessus, managing director of the IMF, said a delegation from
the Fund would shortly be visiting Brazil to establish "a new
macroeconomic and monetary framework".


Fund officials also believe that high interest rates could be required
to stabilise the currency.


The Financial Times, Jan. 19, 1999


Commodity Futures

The CFTC Doesn't Believe in the First Amendment

by Declan McCullagh

WASHINGTON -- Ever thought of slapping up a Web page devoted to gold
prices? Got an urge to vent about those overpriced pork bellies?
Be careful. Unless a public-interest law firm wins a trial scheduled for
29 March, you could face a US$500,000 fine and five years in federal
prison.

That's the penalty a little-known federal agency called the Commodity
Futures Trading Commission (CFTC) has ordered, and the Institute for
Justice is hoping to overturn the decision with a First Amendment
lawsuit.

US District Judge Ricardo Urbina rejected the institute's request for
summary judgment at a hearing Thursday, saying he needed more
information -- and a full trial -- before ruling on the case.

CFTC's "Interpretation Regarding Use of Electronic Media" requires
anyone who wants to publish opinions on commodity futures to ask for a
license -- a tedious process that includes fingerprinting, fees, audits,
and a background check. Publishing without registration is a federal
felony.

"They're opinions. You can't license someone who's giving their
opinions," Institute for Justice staff attorney Scott Bullock said after
the hearing.

"This shows the federal government is actively trying to regulate the
Internet outside the context of indecency, which has received most of
the attention."

Bullock was referring to the well-publicized and ultimately doomed
Communications Decency Act, which restricted online indecency. Its
successor is the subject of a trial in a Philadelphia federal courtroom
next week.

The Institute for Justice -- a nonprofit group staffed by free-market
litigators -- sued the CFTC in 1997. The lawsuit claims that requiring a
person to register as a "commodity trading advisor" -- even if the
person does not manage funds or offer personal advice -- violates the
First Amendment's prohibition on government licensing of the press.
Plaintiffs in the suit include Internet publishers, authors, and
subscribers.

CFTC in 1996 updated its regulations, which already applied to
newsletters, to include the Internet and computer software. The agency
defends the rules as a necessary "cornerstone of the regulatory
framework enacted by Congress" to protect consumers.

The regulations say anyone who, "for compensation or profit, engages in
the business of advising others" through electronic media such as the
Internet must register with the government. As an example, the agency
says an owner of a Web site with "a list of hyperlinks" recommending
other Web sites must register -- or go to jail.

Giving the Institute for Justice a boost in their lawsuit is a similar
1985 Supreme Court case that said "petitioners' publications fall within
the statutory exclusion for bona fide publications" under Securities and
Exchange Commission rules, though the justices did not rule on First
Amendment grounds.

Congress in 1974 created the CFTC to regulate futures contracts for
commodities, including oil, natural gas, currency, electricity, and
agricultural products.

Wired News, Jan. 14, 1999
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Aloha, He'Ping,
Om, Shalom, Salaam.
Em Hotep, Peace Be,
Omnia Bona Bonis,
All My Relations.
Adieu, Adios, Aloha.
Amen.
Roads End
Kris

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